Financing health and mental health care for the severely mentally ill (SMI) has become increasingly dependent on Medicaid programs. At the same time, cost containment initiatives at both state and federal levels have promoted policies that limit coverage, constrain prices, and encourage efficiency (e.g., capitation payment). While the immediate effect of such changes might be expected to lead to some savings, challenges have been raised that the longer term effects may increase costs and adversely affect the quality of care. Among the SMI, there are specific concerns that limiting access to community services may be expected to increase dependence on high cost inpatient care (e.g., increase rehospitalization rates). Although Medicaid is a major payer for the SMI, little information has been available to answer a variety of fundsamental policy relevant questions; these include: Who are the SMI on Medicaid? What resources do they utilize? What does it cost to care for them? and What impact do changes in Medicaid payment policies have on patterns of utilization and costs for the SMI? The proposed research will use Medicaid Management Information Systems (MMIS) in Michigan and Maryland to address methodological and substantive concerns with the SMI on Medicaid; specifically the aims of the research are to: (1) identify SMI on Medicaid using diagnostic and utilization information through the development and testing of classifications based on type of mental disorder and extent of disability; (2) determine the overall use of health and mental health services by the SMI, and their costs, and identify factors related to variations in utilization and cost; (3) apply an episode of care framework to examine the relationship of continuity of care and type of care source after hospital discharge to utilization-based indicators of patient outcomes, including tenure in the community and rehospitalization within one year. The results of this research are expected to be useful to states in developing information using MMIS on their SMI populations, to policy makers of state and federal levels in assissing the implications of policy changes and for researchers concerned with the evaluation of public lopicy on this high risk population.